Transcript: Activision Blizzard Q4 2010 Financial Results Conference

Activision Blizzard, Inc. (Nasdaq: ATVI) released its fourth quarter and calendar year 2010 results after the close of the market on Wednesday, February 9, 2011 at 1:30pm Pacific Time.

Mike Morhaime (president, Blizzard Entertainment) said there will be more details about Diablo III Beta at the next Financial Conference Call, which seems to indicate it might start in 2011, and as a guess-timate I’d say 2012 launch date considering beta testing usually lasts around six months. Sounds exciting.

A few days ago, Blizzard Entertainment announced BlizzCon 2011 will take place at the Anaheim Convention Center this upcoming October 21-22.

In previous conferences, Mike Morhaime announced the approximate date of StarCraft II: Wings of Liberty beta test, the plans for a charity-motivated WoW vanity pet sales: the Wind Rider Cub and the Gryphon Hatchling, and he also revealed the date of BlizzCon 2010. This conference is always a platform for some kind of official announcement by Blizzard Entertainment.

TRANSCRIPT

Mike Morhaime: Before I discuss our performance in 2010, I wanted to note that yersterday was the 20th Anniversary of Blizzard Entertainment. It’s hard to believe that the company has grown from a trio of UCLA engineering graduates to one that serves millions of players around the world.

That success has been fueled by continuity. Many of the original Blizzard employees who joined us in the early years are still with us today, and we have worked hard to pass on our core values and reinforce our culture of excellence with our new employees.

We were a company of gamers back then, and we are still a company of gamers today.

We have assembled some of the strongest and most passionate development teams in the industry, and that positions us well to continue delivering epic entertainment experiences.

Blizzard’s 20th year was our best yet. We shipped two games: StarCraft II: Wings of Liberty and World of Warcraft: Cataclysm that was incredibly successful.

StarCraft II and Cataclysm were the Top 2 selling PC Games in 2010 in retail in North America, and Europe combined. These two games have delivered a record year.

At 2010, Non-GAPP revenues exceeded $1.65 Billion dollars, an increase of 38% from 2009. In addition, our non-GAPP operating income reached $850 million dollars, this year, increasing 53% over the prior year.

As we previously announced, World of Warcraft reached 12 million subscribers worldwide last year, and has grown from there following the release of Cataclysm in December. That release with another record-breaking record-breaker for Blizzard Entertainment.

Worldwide sales as of day one topped 3.3 million units, and one-month sales hit more than 4.7 million units.

These sale numbers are a reflection of the ongoing strength of World of Warcraft and our community. Even as the game has passed the sixth year mark., the critics have also reacted positively with the game currently holding a 90 average of metacritic, and end of the Year Awards.

Our developers have continued to raise the bar for quality, and creativity in the MMO space. The award-winning content they have created in Cataclysm will help us maintain our competitive advantage as new competitors come online in the future.

In addition to Cataclysm, we are seeing continued success with StarCraft II. The game has won several major gaming awards including a spot in the Time Magazine Top 10 Games for 2010, and Wired overall Game of the Year.

Sales continue to be strong with StarCraft II approaching 4.5 Million units sold to date worldwide. With our developers working hard to support this huge new community, we have added new features such as Chat Channels on Battle.net at the request of our players.

We also just released a trio of official custom games a few weeks ago. These custom maps are important to the longevity of StarCraft II, as they showcase pluzzle and party game modes that are popular with casual players.

The new map releases also include a lot of artwork for the community to use in creating their own custom maps. To date, worldwide, StarCraft II community developers have uploaded more than 150,000 maps to Battle.net.

As we head into 2011, we want to build upon the momentum from the launches of Cataclysm and StarCraft II. We will focus on growing our World of Warcraft community by supporting our players. The developers are already hard at work on additional updates for the game. We’re also working with our partner NetEase to prepare Cataclysm for launch in China, which includes getting the proper government approvals. Our goal is to reduce the amount of time between our game launches in China versus the rest of the world.

On the StarCraft II front, we will continue to improve the Battle.net experience, as well as create new content for our players. We recently began public testing on a handful of the ladder maps to keep the game fresh for our multiplayer community. And as with Cataclysm, we’re working with our partners at NetEase to prepare StarCraft II for launch in China.

However, we have no specific updates to share at this time. Finally, the development team is hard at work on Heart of the Swarm, which is first expansion to StarCraft II. We are looking forward to sharing more information about that expansion, as I said, in the coming months.

As for Diablo III, development continues to go well, and we’re very excited about the game. Our most recent public showcase for Diablo III was at the G-Star show in Korea, where demo stations attracted huge lines of players. I’m looking forward to sharing some more news about the game and our upcoming beta on the next call.

Finally, I wanted to remind everyone that we just announced our BlizzCon show for 2011, which will be taking place on October 21 and 22 at the Anaheim Convention Center. Our shows keep getting better and better every year, and we are looking forward to meeting with our players and sharing exciting news about Blizzard at the event.

In summary, 2010 was a great way to cap off an amazing 20-year run at Blizzard Entertainment. We added more titles our stream of best-selling, award-winning games, and more gamers around the world are playing Blizzard games today than ever before.

The next 20 years promise to be even better. The games we operate today and the games we have in the pipeline represent the best and widest slate of content that Blizzard has ever produced. The future looks bright.

As more and more people around the world get access to broadband and become interested in online gaming, Blizzard is in a unique leadership position to attract those players to become part of our community.

Q&A

Jeetil Patel (Deutsche Bank): Your 2011 guidance for the year, you have a comment in there in that it does not yet include a Blizzard title. I guess what is the qualifier to get a Blizzard title out this year? I guess it seems like the commentary seems awfully interesting in that. Are you waiting for some sort of percentage completion, competitive slate? Can you just maybe elaborate more as to why there isn’t a Blizzard title this year? Second, can you or do you plan to leverage your World of Warcraft or Call of Duty kind of user base to reach and offer a services model similar to Netflix? I mean it’s interesting that you’ve got a great content offering as a services offering at Netflix, can you leverage your two major IPs or two significant subscriber bases today to do something similar in gaming? Or do you think you need a new or different platform to deliver content in the form of gaming as a service?

Thomas Tippl: I don’t know how many questions those were but hopefully we kept track of all of them. On the first one, with regards to the commentary around the Blizzard title. As you know and, as we said before, we think that in the long run Blizzard is good for one major release a year. But of course, what always rules is the quality of the game has to be there. And that’s why, for example, we didn’t have a release in 2009, but we had two releases in 2010. And as you can see, the results speak for themselves. I think that has played out well for our shareholders. With regards to Diablo, we don’t have a date yet. So we felt it was prudent not to bake it in, because again we don’t want to find ourselves in a situation where we either disappoint or would have to make any compromises on the game quality which we would never do. If the title ships, obviously, that will present material upside to the outlook that we have provided.

Jeetil Patel – (Deutsche Bank): I guess going back to the Diablo question, I guess can you talk about how far along it is in terms of percentage of completion?

Michael Morhaime: I don’t have a percentage of completion rating for you today, other than to say that the game’s coming along very well. We are very happy with the development progress that the team is making, but until we get to beta and we have the community help us test the game, we aren’t going to lock in a release date. And so I just want to clarify that we are not setting a date. I am not saying that it’s going to be 2012. I am just saying that there isn’t a date yet. And so given that we haven’t locked into a date, we fully support the decision not to include it in guidance.

2010 Revenues From Digital Channels Grow Over 20% to More Than $1.5 Billion

Company Announces New $1.5 Billion Stock Repurchase Program

Company Announces 10% Increase in Cash Dividend to $0.165 per Common Share

SANTA MONICA, Calif. , Feb. 9, 2011 /PRNewswire/ – Activision Blizzard, Inc. (Nasdaq: ATVI) today announced financial results for the calendar year and quarter ending December 31, 2010 . Activision Blizzard reports results on both a GAAP and a non-GAAP basis. A reconciliation of the company’s GAAP and non-GAAP results can be found in the attached tables.

For calendar year 2010, Activision Blizzard’s GAAP net revenues increased to $4.45 billion , as compared with $4.28 billion for 2009. On a non-GAAP basis, the company’s net revenues were $4.80 billion , as compared with $4.78 billion for 2009. Revenues from digital channels for the calendar year were more than $1.5 billion , an increase of more than 20% year over year.

For calendar year 2010, Activision Blizzard’s GAAP earnings per diluted share increased to $0.33 , as compared with $0.09 per diluted share for 2009. The 2010 results include a $0.16 per share non-cash reduction in the valuation of intangible assets reflecting weaker retail sales in the casual and music genres, while the 2009 results included a similar non-cash charge of $0.19 per share. On a non-GAAP basis, the company’s earnings per diluted share grew 14.5% to $0.79 , as compared with $0.69 per diluted share for 2009.

For the quarter ended December 31, 2010 , Activision Blizzard’s GAAP net revenues were $1.43 billion as compared with fourth-quarter 2009 net revenues of $1.56 billion . On a non-GAAP basis, the company’s net revenues for the quarter were $2.55 billion , as compared with fourth-quarter 2009 non-GAAP net revenues of $2.50 billion . Revenues from digital channels for the quarter were more than $470 million , an increase of 40% year over year.

For the quarter ended December 31, 2010 , Activision Blizzard had a GAAP loss per share of $0.20 , inclusive of the $0.16 per share non-cash charge mentioned above. On a non-GAAP basis, the company’s earnings per diluted share grew to $0.53 . For the comparable quarter in 2009, the company had a GAAP loss per share of $0.23 , inclusive of the $0.19 per share non-cash charge mentioned above, and non-GAAP earnings per diluted share of $0.49 .

Robert Kotick , CEO of Activision Blizzard , stated, “Because of focus and disciplined execution, 2010 was another extraordinary year for Activision Blizzard . We made some of the best games we have ever made in over 30 years of being in the interactive entertainment business. We benefited from new content releases for two of the world’s most successful online entertainment franchises: Activision Publishing’s Call of Duty®: Black Ops and Blizzard Entertainment’s World of Warcraft®: Cataclysm™, a new installment in the world’s largest subscription-based massively multiplayer online role-playing game. During the year, we grew our net revenues, delivered record earnings, achieved record GAAP and non-GAAP operating margins of 11% and 29%, respectively, and generated $1.4 billion in operating cash flow.”

Kotick added, “Activision Blizzard’s key franchises have larger audience bases than ever before and we continue to see significantly enhanced user activity and engagement for our expanding online communities. Our revenues from digital channels, which now account for over 30% of our overall revenues, were driven by increased sales of Activision Publishing’s Call of Duty map packs and value-added services for Blizzard Entertainment’s World of Warcraft. Blizzard significantly evolved its direct digital distribution capabilities with the launch of its new Battle.net® service and saw players embrace its service offerings in record numbers. Notably, since Call of Duty: Black Ops was launched in November players have spent an average of 52 minutes per day playing online, roughly equivalent to the 55 minutes that the average user spends each day on Facebook.(1) As of February 2, 2011 , more than 27 million gamers have played Call of Duty games online, logging more than 2 billion hours, or the equivalent of more than 229,000 years of gameplay.(2)”

Kotick concluded, “Online gaming continues to broaden its appeal. Our shareholders continue to be well positioned to benefit from these trends and the focus of our incredibly talented employees around the world continues to allow us to lead our industry. We expect to continue to drive long-term growth, increase our return on invested capital and generate strong cash flow as we have over the last few years. Our strong balance sheet affords us the financial flexibility to invest in games that few companies have the ability to create and allows us to provide our shareholders with value through dividends and share repurchases.”

Business Highlights

Activision Blizzard was the #1 publisher overall in North America and Europe for the calendar year.(3)

Activision Blizzard was the #1 publisher in North America on the Xbox® 360, PlayStation® 3 and PC collectively for the calendar year.(4)

Blizzard Entertainment’s World of Warcraft: Cataclysm, which was launched on December 7, 2010 , sold through more than 3.3 million copies worldwide during its first 24 hours of release, making it the fastest-selling PC game of all time. It continued to sell through more than 4.7 million copies in its first month.(5)

As of December 31, 2010 , more than 12 million gamers worldwide are subscribed to play Blizzard Entertainment’s World of Warcraft.(6)

For the December quarter, in North America and Europe, Call of Duty: Black Ops was the #1 best-selling console title in dollars ever during a single quarter and the Call of Duty franchise was the #1 franchise overall.(3)

In November 2010 , Call of Duty: Black Ops became the first video game ever to surpass $650 million in retail sales in its first five days of release.(2) To date, the game has achieved more than $1 billion in retail sales worldwide.(3)

As of January 31, 2011 , total unique gamers playing Activision Publishing’s Call of Duty: Black Ops increased by more than 49% over the number of total unique gamers that played Call of Duty®: Modern Warfare® for the first three months after each game’s release.(7)

On February 1, 2011 , Activision Publishing released Call of Duty: Black Ops First Strike, the first add-on pack for Call of Duty: Black Ops, on Xbox LIVE®. The map pack set new Xbox LIVE records with more than 1.4 million downloads in the first 24 hours, an increase of more than 25% over last year’s Call of Duty: Modern Warfare 2 Stimulus Package.(7) The map pack also will be available on the PlayStation® 3 computer entertainment system on March 3, 2011 and on the PC later in the quarter.

Company Outlook

Activision Blizzard will continue to invest its capital and resources in the significant opportunities afforded by online gaming worldwide and will reduce its exposure to low-margin and low-potential businesses. In 2011, the company will allocate the majority of its resources and focus toward opportunities which we expect will afford us the greatest competitive advantages and the greatest potential for best-in-class quality, high-margin digital growth, and long-term success. These opportunities include Blizzard Entertainment’s games currently in development, robust investment in forthcoming Call of Duty titles, the development of a best-in-class digital community surrounding the Call of Duty franchise, a new property from Bungie and an innovative new universe with broad appeal that will be revealed at Toy Fair later this week and will bring the world of toys, video games and the Internet together in an unprecedented way. These investments should better position Activision Blizzard for long-term growth and enable it to continue expanding its position as the largest digital publisher.

At the same time, due to continued declines in the music genre, the company will disband Activision Publishing’s Guitar Hero business unit and discontinue development on its Guitar Hero game for 2011. The company also will stop development on True Crime: Hong Kong™. These decisions are based on the desire to focus on the greatest opportunities that the company currently has to create the world’s best interactive entertainment experiences.

For calendar year 2011, Activision Blizzard expects GAAP net revenues to be $3.95 billion and GAAP earnings per diluted share to be $0.56 . On a non-GAAP basis, the company expects net revenues of $3.9 billion and non-GAAP earnings per diluted share to be $0.70 for the calendar year. Since Blizzard Entertainment has not confirmed a launch date for its next global release, the company’s calendar year outlook at this time does not yet include a new game from Blizzard in 2011.

For the first quarter of 2011, Activision Blizzard expects GAAP net revenues of $1.28 billion , and GAAP earnings per diluted share of $0.28 . The company’s first quarter GAAP earnings per diluted share outlook includes the impact of between $0.02 – $0.03 of expenses related to the restructuring. On a non-GAAP basis, the company expects net revenues of $640 million and $0.07 earnings per diluted share for the first quarter.

Activision Blizzard’s financial outlook is subject to significant risks and uncertainties, including declines in demand for its products, competition, the effectiveness of the company’s restructuring efforts, fluctuations in foreign exchange and tax rates, and counterparty risks relating to customers, licensees, licensors and manufacturers.

The company’s outlook is also based on assumptions about sell-through rates for its products, and the launch timing, success and pricing of its new slate of products. Current macroeconomic conditions increase those risks and uncertainties. As a result of these and other factors, actual results may deviate materially from the outlook presented above.

Board Authorizes Stock Repurchase Program and Declares Cash Dividend

Activision Blizzard today announced that its Board of Directors has authorized a new stock repurchase program under which the company can repurchase up to $1.5 billion of the company’s outstanding common stock. This program replaces the company’s $1 billion stock repurchase plan program authorized in February 2010 , which expired on December 31, 2010 . As of December 31, 2010 , Activision Blizzard had purchased an aggregate of 86 million shares of its common stock for approximately $966 million under the 2010 program.

The Board of Directors also declared a cash dividend of $0.165 per common share payable on May 11, 2011 to shareholders of record at the close of business on March 16, 2011 . This is the company’s second-ever cash dividend and it represents a 10% increase over its first-ever dividend that was issued in 2010.

Conference Call

Today at 4:30 p.m. EST , Activision Blizzard’s management will host a conference call and Webcast to discuss the company’s results for the quarter and year ended December 31, 2010 and management’s outlook for 2011. The company welcomes all members of the financial and media communities and other interested parties to visit the “Investor Relations” area of www.activisionblizzard.com to listen to the conference call and view a brief supporting slide presentation via live Webcast or to listen to the call live by dialing into 877-397-0292 in the U.S. with passcode 8890647.

Non-GAAP Financial Measures

Activision Blizzard provides net revenues, net income (loss), earnings (loss) per share and operating margin data and guidance both including (in accordance with GAAP) and excluding (non-GAAP) the following items: the impact of the change in deferred net revenues and related cost of sales with respect to certain of the company’s online-enabled games; expenses related to share-based payments; Activision Blizzard’s non-core exit operations (which are the operating results of products and operations of the historical Vivendi Games, Inc. businesses that the company has exited or substantially wound down); costs related to the business combination between Activision, Inc. and Vivendi Games, Inc. (including transaction costs, integration costs, and restructuring activities); expenses related to the restructuring of our Activision Publishing operations; the amortization of intangibles and impairment of intangible assets; and the associated tax benefits.

Management believes that the presentation of these non-GAAP financial measures provides investors with additional useful information to measure Activision Blizzard’s financial and operating performance because they facilitate comparison of operating performance between periods and help investors to better understand the operating results of Activision Blizzard .

Internally, management uses these non-GAAP financial measures in assessing the company’s operating results, as well as in planning and forecasting.

Non-GAAP financial measures should be considered in addition to, not as a substitute for or superior to, financial measures determined in accordance with GAAP. Activision Blizzard recognizes that there are limitations associated with the use of these non-GAAP financial measures.

Activision Blizzard’s non-GAAP financial measures are not based on a comprehensive set of accounting rules or principles, and the terms non-GAAP net revenues, non-GAAP net income, non-GAAP earnings per share, and non-GAAP operating margin do not have a standardized meaning. Therefore, other companies may use the same or similarly named measures, but exclude different items, which may not provide investors a comparable view of Activision Blizzard ‘s performance in relation to other companies.

Management compensates for the limitations resulting from the exclusion of these items by considering the impact of the items separately and by considering Activision Blizzard’s GAAP, as well as non-GAAP results and outlook and, in this release, by presenting the most comparable GAAP measures directly ahead of non-GAAP measures, and by providing a reconciliation that indicates and describes the adjustments made.